It's been a year since WarnerMedia merged with Discovery to create a new entertainment giant, Warner Bros. Discovery (WBD -2.17%). With the company stock down 40% from where it was 12 months ago, some investors may question whether Warner Bros. Discovery is a worthwhile bet. Let's explore the current state of the business and whether there are signs its prospects may improve over the long term.
A bumpy year in business
Warner Bros. Discovery's first year as a brand has certainly been storied; from shutting down movie projects to pulling shows from its HBO Max streaming service, the company has made headlines for upsetting many people in Hollywood. Those moves have also snagged the attention of a group of U.S. House Democrats who are now urging the Department of Justice (DOJ) to open an investigation into the formation of Warner Bros. Discovery, raising the specter of the deal possibly being undone.
Of course, it is important to highlight that the DOJ very rarely unwinds mergers, and as things stand, there is no active investigation, just a call for one. However, the lawmakers' complaints do highlight a key issue for Warner Bros. Discovery stakeholders -- the company's current debt burden.
Warner Bros. Discovery's cumulative debt is close to $50 billion. And while the company made great strides to reduce its overhead (hence the aforementioned cuts), Warner Bros. Discovery had to write off many billions of dollars as it seeks to put itself back in the black.
Despite the pain of restructuring, stakeholders may take some solace in the words of Warner Bros. Discovery CFO Gunnar Wiedenfels, who at the start of 2023 said the company was now focused on "relaunching and building" its operations.
A reworked streaming strategy
For stakeholders, the promise of combining Warner Media with Discovery was always the might of a blended content library.
From nature documentaries and reality shows to premium episodic dramas and blockbuster movies, the company has a vast and diverse programming library. Now, under the auspices of creating more consumer value, Warner Bros. Discovery is bringing much of its catalog to a unified streaming service that will supplant HBO Max. (Discovery+ will continue to operate as a stand-alone service.)
If Warner Bros. Discovery can make the service attractive enough, then there may even be opportunities for it to raise prices as well.
Speaking during a media conference in late 2022, Wiedenfels posited the company's current streaming offerings were "fundamentally underpriced." Warner Bros. Discovery has not yet discussed the pricing of its new service, or even disclosed what it will be called. Nonetheless, the platform is scheduled to launch this spring, so those details should soon be clear.
A move into FAST
Warner Bros. Discovery has made clear that it also sees an opening in free ad-supported television (FAST) -- a sector of the streaming industry that has grown at a rapid clip in recent years. According to video service operator Plex, FAST content accounted for 30% of all programming on its platform in 2022 -- up from 6% in 2020.
David Zaslav, Warner Bros. Discovery CEO, says the company plans to launch a FAST product at some point in 2023. As Zaslav explained during Warner Bros. Discovery's fourth-quarter 2022 earnings call, the company is in a unique position to challenge its FAST rivals.
"[W]e have the largest TV and motion picture library in the world," he said. "And we can create a Tubi or a Pluto without buying content from anybody."
A focus on games
Zaslav is not just bullish on Warner Bros. Discovery's ability to push further into the streaming space. During the investor call, the CEO also cited video games as "a core part" of the company's business strategy. And from this angle, Warner Bros. Discovery is showing some very promising returns.
Warner Bros. Discovery subsidiary Warner Bros. Games released the Harry Potter title Hogwarts Legacy in early February 2023, and within weeks the video game sold more than 12 million copies, bringing in $850 million in revenue for the company. And as Zaslav notes, the game is still set to launch on several more platforms over the coming months, including Nintendo's Switch and Microsoft's Xbox One.
Taken together, Warner Bros. Discovery's moves in streaming and video games suggest the company is on the right track. Still, it remains to be seen if it will be enough to get it out from the weight of its debt.
Market-watchers will do well to see what Warner Bros. Discovery has to say during its next earnings report. If its streaming subscriber numbers are up and Warner Bros. Games is still doing well, then it could be a sign of green shoots ahead. If not, then stakeholders may question if Warner Bros. Discovery is the right stock for them.
